Supreme Court Continues to Disfavor Non-Compete Covenants Unsupported by Consideration

An agreement containing a non-compete covenant executed during employment can be challenged for lack of consideration even though the parties intended to be legally bound pursuant to the Uniform Written Obligations Act (UWOA), the Pennsylvania Supreme Court held in Socko v. Mid-Atlantic Systems of CPA, Inc., __ A.3d __ (No. 142 MAP 2014, filed Nov. 18, 2015). David Socko signed a non-competition agreement while he was employed as a salesperson by Mid-Atlantic Systems. The agreement expressly stated that the parties intended to be “legally bound.” Litigation ensued after Socko resigned and went to work for a competitor of Mid-Atlantic. Socko argued that the non-compete clause was unenforceable because it was not supported by new consideration. The trial court agreed and granted summary judgment in favor of Socko.

On appeal, the Superior Court acknowledged that under the UWOA a written promise shall not be invalid or unenforceable for lack of consideration if the writing also contains an express statement that the signer “intends to be legally bound.” 33 P.S. §6. Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa. Super. 2014). Nevertheless, the Court noted that courts still inquire into the adequacy of consideration for restrictive covenants in employment contracts, and the language “agreeing to be legally bound” is inadequate even if it satisfies the UWOA. The Court analogized this case to contract-under-seal cases holding that a seal is inadequate consideration to support a covenant in restraint of trade.

The Supreme Court allowed Mid-Atlantic’s appeal and affirmed the Superior Court’s decision. Writing for the 4-1 majority, Justice Todd concluded that a contract containing the UWOA’s express statement of intent to be “legally bound” supplies the necessary consideration to support enforcement of the agreement. Nevertheless, because the UWOA was enacted prior to September 1, 1937, the Court explained that it must be strictly construed because it is in derogation of the common law mandating that restrictive covenants be supported by actual consideration. See 1 Pa. C.S. §1928(b)(8). Given that history, the Court held that “a construction of the UWOA which would vitiate the need for new and valuable consideration when entering into an agreement containing a restrictive covenant after the initiation of employment would be unreasonable.” Thus, the Court held that Socko could challenge Mid-Atlantic’s non-compete covenant notwithstanding the “intend to be legally bound” language.

Chief Justice Saylor authored a concurring opinion “to clarify the effect of a statement of intention to be bound, per the

[UWOA] in its general application, as dispensing with the requirement for consideration rather than supplying it.” Justice Eakin, in a dissenting opinion, disagreed with the majority’s conclusion that the UWOA serves as a substitute for consideration. Rather, Justice Eakin opined that inclusion of the act’s “legally bound” language forecloses a party from challenging an agreement for lack of consideration, including an agreement containing a non-compete covenant, which is not expressly exempted under the UWOA.
By | 2017-05-19T22:51:25+00:00 December 9th, 2015|Categories: Employment Law, Labor Law|Tags: , , , , , , , , , , , , |Comments Off on Supreme Court Continues to Disfavor Non-Compete Covenants Unsupported by Consideration

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